2018 Northwest Compliance Conference October 4, 2018

Transcription

1 Flood Changes 2018 Northwest Compliance Conference October 4, 2018 Kathleen O. Blanchard, CRCM Key Compliance Services, LLC

2 History of Flood Insurance

3 History of Flood Insurance National Flood Insurance Act of Federally subsidized flood insurance became available to owners of improved real estate or mobile homes located in SFHAs in participating communities Flood Disaster Protection Act of 1973 Federally regulated financing institutions (the ones the federal government could control) prohibited from making, increasing, extending or renewing a loan secured by improved real estate or a mobile home located or to be located in an SFHA in an NFIP-participating community without flood insurance in place

4 History of Flood Insurance Title V, Riegle Community Development and Regulatory Improvement Act required force placement as a safety and soundness issue. Previously, policies would be cancelled or expire with no repercussions Biggert-Waters Flood Insurance Reform Act Increased the penalty per flood violati:on to $2,000 Raised the cap on the maximum limit for systemic flood violations Changed the timeframe in which FIs could force-place flood insurance and impose the charge for force-placed insurance on a borrower Began phasing out subsidized rates

5 History of Flood Insurance Homeowners Flood Insurance Affordability Act - Repealed specific provisions of the BWA and halted the phaseout of flood insurance subsidies The subsidy repeal was wanted because the NFIP is running out of money but the financial effect on consumers did not go over well.

6 NFIP Status Will Hurricane Florence lead to a comprehensive program update? The program, administered through the Federal Emergency Management Agency, is the primary source of flood insurance in the U.S. with about 5 million policy holders across the country. The NFIP is more than $20 billion in debt (prior to Hurricane Florence). NFIP debt was $0 in 2004!!!

7 Recent Costs Congress spent $120 billion on disaster relief related to 2017 s hurricanes and wildfires, and forgave $16 billion in debt accrued by the National Flood Insurance Program. Hurricane Florence: According to CoreLogic, flood loss for residential and commercial properties in North Carolina, South Carolina and Virginia is estimated to be between $19 billion and $28.5 billion which includes both storm surge and inland flooding. Of that, $13 billion to $18.5 billion is uninsured.

8 Reform Efforts 21st Century Flood Reform Act (H.R. 2874), would limit future coverage and discounts for high-risk properties, modify premiums and surcharges paid by policyholders, expand opportunities for private insurers to sell policies, offer assistance to low-income households, and authorize financing for flood mitigation assistance. Passed by House November 2017; no action by Senate to date. Three bills have been introduced in the Senate to extend the NFIP authorization (S. 1313, S. 1368, and S. 1571). The House bill will expire if Senate does not take action this term.

9 Reform Efforts Congress forgave $16 billion in 2017, based on FEMA s then-current projections of total 2017 hurricane claims, provided by White House Budget Director Mick Mulvaney. Mulvaney proposed paring that forgiveness with a series of reforms that largely mirrored, and in some cases went beyond, those included in H.R. 2874, the 21st Century Flood Reform Act, which passed the U.S. House in November by a vote. Congress moved within weeks to forgive the debt, the reforms never came.

10 Program Lapse Management

11 NFIP Program Lapse Management Congress must periodically renew the NFIP s statutory authority to operate. On July 31, 2018, the President signed legislation passed by Congress that extends the National Flood Insurance Program s (NFIP s) authorization to November 30, Congress must now reauthorize the NFIP by no later than 11:59 pm on November 30, Here we go again!

12 Past Lapses The NFIP was extended 17 times between 2008 and 2012, and lapsed four times: March 1 to March 2, 2010; March 29 to April 15, 2010; June 1 to July 2, 2010; and October 1 to October 5, 2011.

13 NFIP Lapses and Renewals Authorization of the NFIP was extended from September 30 until December 8, 2017 (Section 130 of P.L ), extended until December 22, 2017 (P.L ), and again until January 19, 2018 (P.L ). The NFIP lapsed between January 20 and January 22, 2018, and received a fourth short-term reauthorization until February 8, 2018 (P.L ). FEMA was authorized to honor all policy-related transactions accepted during the NFIP lapse. The NFIP lapsed again for approximately eight hours during a brief government shut-down in the early morning of February 9, 2018, and was then reauthorized until March 23, 2018 (P.L ). The NFIP received a sixth reauthorization until July 31, 2018 (P.L ), and a seventh reauthorization until November 30, 2018 (P.L ).

14 What if the NFIP Lapses? Unless reauthorized or amended by Congress, the following will occur on November 30, 2018: The authority to provide new flood insurance contracts will expire. Flood insurance contracts entered into before the expiration would continue until the end of their policy term of one year. The authority for NFIP to borrow funds from the Treasury will be reduced from $ billion to $1 billion.

15 What if the NFIP Lapses? The NFIP is the primary source of flood insurance coverage for residential properties in the United States. As of May 2018, the NFIP had over 5 million flood insurance policies providing over $1.28 trillion in coverage, with approximately 23,000 communities in 56 states and jurisdictions participating. NFIP collects about $3.6 billion in annual premium revenue. A lapse in authorization on or after 11/30/2018 would reduce borrowing authority is reduced to $1 billion, FEMA would continue to adjust and pay claims as premium dollars come into the National Flood Insurance Fund (NFIF) and reserve fund. If the funds available to pay claims were, claims would have to wait until sufficient premiums were received to pay them unless Congress were to appropriate supplemental funds to the NFIP to pay claims or increase the borrowing limit.

16 NFIP Program Lapse Management FEMA and Congress have always honored the flood insurance contracts in place with NFIP policyholders. FEMA would still have authority to ensure the payment of valid claims with available funds in the event the program lapses. BUT: FEMA would stop selling and renewing policies for millions of properties in communities across the nation.

17 What Happened During Past Lapses? In most cases when the NFIP lapsed, Congress reauthorized the NFIP retroactively. During these NFIP lapses, the OCC, FRB, FDIC and NCUA issued guidance to lending institutions. FEMA provided guidance for the WriteYour-Own (WYO) Program, where private insurance companies are paid to write and service NFIP policies. Borrowers were not able to obtain flood insurance to close, renew, or increase loans secured by property in a SFHA until the NFIP was reauthorized. During the lapse in June 2010, estimates suggest that over 1,400 home sale closings were cancelled or delayed each day, representing over 40,000 sales per month. These figures applied to residential properties, but commercial properties were also affected by the NFIP lapse. The largest WYO insurer left the NFIP in 2011 reportedly because of the administrative burden associated with very short-term reauthorizations and lapses in authorization.

18 What To Do If Program Lapses? Each regulator (OCC, FDIC, FRB, NCUA) has issued instructions (back in 2010 but still valid) re how to handle lapses in the program. Banks may continue to make loans subject to the National Flood Insurance Act, without flood insurance during a period when the NFIP is not available with consideration of the risks. Such lending does not violate the requirements.

19 What To Do If Program Lapses? Insurance is not available = a safety and soundness decision like lending in a non-participating community. Despite a lapse of FEMA authority, banks must continue to: make flood determinations, provide timely, complete and accurate notices to borrowers, and comply with other parts of the flood insurance regulations.

20 Evaluate Risks of Closing Loans Banks should evaluate safety-and-soundness and legal risks during the lapse period and prudently manage those risks. Appropriate measures should be taken to mitigate loss exposures. Regulated institutions should have a system in place to ensure flood insurance policies are obtained as soon as available following reauthorization for properties subject to the mandatory purchase requirement. Current FEMA guidance to the companies and agents who handle NFIP policies is available at the following Website: pdf

21 New Loans and Lapses Loans needing flood insurance can still close during a lapse in the NFIP, either by following NFIP and regulatory guidelines and ensuring that a system is in place to obtain policies as soon as the NFIP is reauthorized, or by obtaining private flood insurance.

22 New Loans and Lapses A borrower can complete the application and pay the premium, which will be held by the insurance company for processing pending congressional reauthorization. In addition: These applications will be processed as soon as the program is reauthorized and made effective to the fullest extent of that authority. If authorization is not granted, the premiums will be refunded and the new and renewal policies held in abeyance will not be issued. You should advise borrowers that remittance of the application and payment will not result in immediate NFIP coverage and cannot legally be required until reauthorization. You should also advise them of the consequences of nonretroactive reauthorization. You should ensure borrowers with property in flood hazard areas are similarly informed of the implications of closing on a mortgage loan during a lapse.

23 New Loans and Lapses Risk of loss to the financial institution may be judged to warrant a postponement in closing the loan until the NFIP has been reauthorized. Private flood insurance may be required where available, as a condition of closing the loan. Cost of a private policy might be such that it would influence you or the borrower to postpone closing rather than incur a long-term obligation to address a possible short-term lapse.

24 New Loans and Lapses May make the loan without requiring the borrower to apply for flood insurance and pay the premium pending reauthorization. Risks should be carefully evaluated. If Congress reauthorizes the NFIP after a lapse, regulators expect that flood insurance will be obtained for these loans, including, if necessary, by forced placement, as provided for in 12 C.F.R Before making such loans, you should ensure borrowers are aware of the flood insurance requirements and that force-placed insurance is typically more costly than borrower-obtained insurance. You also should have a system to identify these loans to ensure that insurance is purchased if the NFIP is reauthorized subsequent to closing.

25 Have a Contingency Process in Place for Lapses Must track unrenewed renewals and new loans without insurance. Sources for private insurance Notices for borrowers advising of risks System in place to ensure flood insurance policies are obtained as soon as available following reauthorization for properties subject to the mandatory purchase requirement.

26 Pending Renewals Prior to Lapse Borrowers with existing NFIP policies should be advised to consider renewing their policies early if their renewal date falls within a potential lapse. For example, if the current NFIP authorization expires on July 31, and a policy is scheduled to renew on August 15, it may be prudent for the borrower to pay the renewal premium prior to July 31. That would ensure continued coverage for the property even in the event of a lapse, and FEMA would still have authority to ensure the payment of valid claims with available funds.

27 As Soon As Program Reauthorized What to do after a lapse Once the program has been reauthorized, remember to check whether the reauthorization is retroactive. Retroactivity determines the effective date of coverage for any policies applied for during the lapse. If the reauthorization is retroactive to the date of the program lapse, then policies are effective as of the date of application and payment. If the reauthorization is not retroactive, then policies are not effective until the actual date of reauthorization, at the earliest. This means that any losses sustained during the lapse are not recoverable under the NFIP.

28 Adding Premiums and Fees to Loan Balance

29 Adding Premiums and Fees to Loan Balance June 2, 2017 Federal banking agencies clarified that adding premiums and fees for force-placed flood insurance to a borrower s loan balance constitutes a loan balance increase that would be a triggering event under the Flood Disaster Protection Act. The agencies said in a letter to ABA in 2017 that the requirement to add the premiums and fees associated with the lender-placed flood insurance policy applies only when the lender intends to add the premiums and fees to the loan balance.

30 Adding Premiums and Fees to Loan Balance If the premiums and fees are held in an unsecured account or are billed directly to the borrower, the amount of lender-placed flood insurance does not need to include the cost of the premiums and fees unless such amounts are subsequently rolled into the unpaid loan balance.

31 (STILL!!!) 31

32 Private Insurance Policies Biggert-Waters Act requires lenders to accept private flood insurance policies pending issuance of final rule from regulators. Requirement applies if coverage provided by the private policy satisfies the standards specified in the Act: issued by an insurance company that is licensed, admitted, or otherwise approved to engage in the business of insurance in the state in which the insured building is located (or is recognized as a surplus lines insurer); provides flood coverage at least as broad as the coverage provided by a standard flood insurance policy under the NFIP; and includes a mortgage interest clause similar to the clause contained in the standard flood insurance policy. 32

33 Private Insurance Policies Banks have been accepting private insurance for many years, particularly on large dollar loans. Standards used to evaluate private policies are basically the same as those in the old Mandatory Purchase Guide plus those in the October 2013 regulatory proposal. 33

34 FHA Loans and Private Flood Insurance Look for a draft rule from HUD allowing private insurance, possibly in December 2018

35 Private Policy Evaluation Issued by an insurance company that is licensed, admitted or otherwise approved to engage in the business of insurance or, is recognized, or not disapproved, as a surplus lines insurer; Coverage at least as broad as an standard flood insurance policy (SFIP) under the NFIP, including when considering deductibles, exclusions, and conditions offered by the insurer; 45 days written notice of cancellation or non-renewal of flood insurance coverage to the insured and the regulated lending institution; Information about the availability of flood insurance coverage under the NFIP; Mortgage interest clause similar to the clause contained in an SFIP; Requirement for insured to file suit not later than one year after the date of a written denial for all or part of a claim under a policy; and Cancellation provisions as restrictive as the provisions contained in an SFIP. These elements are all we have until a final rule or new law is issued. 35

36 Barriers to Expanded Private Policies Why the reluctance to allow more private insurance? What is Congress doing?

37 Restart of Force Placement Period

38 Restarting Days to Force Place Regulators reached out to ABA re institutions and vendors (handling flood insurance on behalf of financial institutions) Some were restarting force place time period when a policy was received in response to initial notice that was inadequate. A new notice was sent, but the 45 day period was restarted wrong! There is one 45 day period and anything done during that time that does not meet the full requirement does not delay the force placement.

39 OCC Interpretations

40 OCC Interpretations Interpretive Letter # December 2017

41 OCC-Private Flood Deductible Multibuilding Loan If the deductible amount exceeds the insurable value of one or more of the buildings securing a loan, the policy does not, as a factual matter, provide coverage for that building in the event of a loss and would not comply with the statutory and regulatory requirement that, for a mortgage loan secured by a building in a special flood hazard area, the building must be covered by flood insurance.

42 OCC Automatic Extension of Credit Facility An automatic extension of a credit facility that is agreed upon by the lender and the borrower at the origination of a loan and is memorialized in the credit agreement does not constitute a make, increase, extend or renew ( MIRE ) event that would trigger the federal flood insurance requirements because the automatic loan extension was anticipated in the original loan agreement.

43 OCC Multi-tranche Credit Facilities Similar to Participations and Syndications The (single tranche) lender can fulfill its obligation through the upfront due diligence and ongoing monitoring for compliance with flood insurance requirements by the lead lender/administrative agent. The OCC does not expect a lender participating in one tranche in a multi-tranche credit facility to be responsible for taking direct steps to ensure compliance with flood insurance requirements in connection with a MIRE event or cashless roll that occurs in a tranche in which the lender does not participate.

44 Future Update to Flood Q & A The OCC stated that it will recommend that the issues raised with respect to the evaluation of the deductible in a private insurance policy and lender participation in a multi-tranche credit facility be incorporated into future revisions to the Interagency Questions and Answers Regarding Flood Insurance issued by federal banking regulators.

45 Questions Kathleen O. Blanchard, CRCM